Financial system needs reason

August 23, 2010

The nation's home mortgage system crashed for a very simple reason: Some banks - with the encouragement of Congress - handed out big home loans without adequate security. In some cases, they did not even bother to verify loan applicants' incomes.

Packages of mortgages were sold to larger entities, such as the quasi-government Fannie Mae and Freddie Mac companies. All along the line, lenders and those who bought the mortgage packages knew they faced little risk for their actions - because of government guarantees they would not be left holding the bag if borrowers defaulted on their loans.

That system has cost taxpayers hundreds of billions of dollars. Hundreds of billions more may be pumped into entities such as Fannie Mae and Freddie Mac.

This week, representatives of some big financial institutions urged the Treasury Department to maintain the system as it existed before the crash. Without some government insurance, lenders will cut back on mortgages, federal officials were warned.

Treasury Secretary Timothy Geithner said "fundamental change" must be made to the system - but he has not suggested specific policies.

Some conservatives worry about that. U.S. Rep. Spencer Bachus, R-Ala., warned in a letter to Geithner that the Treasury Department appears to be "laying the groundwork ... for a policy outcome that looks uncomfortably similar to the failed status quo."

Bachus is right. The status quo caused a massive financial disaster. Some reasonable alternative needs to be devised and implemented.